A plant which costs N1,000 and has a residual value of N125 is depreciated at 20% per annum. Using the diminishing balance, what is the net book value at th...

A plant which costs N1,000 and has a residual value of N125 is depreciated at 20% per annum. Using the diminishing balance, what is the net book value at the second year?

Answer Details

Using the diminishing balance method, the net book value of a plant at any time is equal to its cost minus the accumulated depreciation. In this case, the plant cost is N1,000 and it has a residual value of N125. This means the total depreciation over its useful life is N1,000 - N125 = N875. The depreciation rate is 20% per annum, so the annual depreciation is 20% x N1,000 = N200. Since we are using the diminishing balance method, we multiply the net book value at the beginning of each year by the depreciation rate of 20% to calculate the depreciation for that year. At the end of the first year, the net book value is N1,000 - N200 = N800. We then calculate the depreciation for the second year as 20% x N800 = N160. The net book value at the end of the second year is N800 - N160 = N640. Therefore, the correct answer is: N640. The net book value of the plant after two years using the diminishing balance method is N640.